India’s rupee fell toward an all-time low on concern the Federal Reserve will pare stimulus, spurring outflows and leaving the currency vulnerable to a record current-account deficit. Bonds gained.
Fed officials signaled this week that cuts to asset purchases that have fueled demand for emerging-market assets are possible next month as the U.S. economic outlook improves. Raghuram Rajan, who will take charge of India’s central bank when Governor Duvvuri Subbarao’s term ends Sept. 4, said yesterday more steps will be taken soon to stabilize the rupee.
“The rupee’s situation is a classic case of demand-supply mismatch, where dollar demand outstrips supply,” Ashtosh Raina, head of foreign-exchange trading at HDFC Bank Ltd. in Mumbai, said today in an interview on Bloomberg TV India. “Unless there’s intervention in the market on a large scale, the rupee will continue to slide.”
The rupee declined 0.8 percent to 61.30 per dollar at the close, according to prices from local banks compiled by Bloomberg. The currency tumbled to an all-time low of 61.8050 yesterday. That prompted the Reserve Bank to intervene, said two traders with knowledge of the matter, who asked not to be identified as the information isn’t public.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 23 basis points, or 0.23 percentage point, to 12.78 percent.
Fed Bank of Chicago President Charles Evans, among the strongest proponents of the monetary accommodation in the U.S., said yesterday he “would clearly not” rule out a decision to begin curbing asset purchases in September. Dallas Fed President Richard Fisher said on Aug. 5 the central bank is closer to slowing $85 billion in monthly bond buying and warned investors not to rely on that stimulus.
Global funds have cut holdings of Indian debt by $9.1 billion since May 22, when Fed Chairman Ben S. Bernanke first signaled a potential tapering. The outflows leave the rupee vulnerable to the nation’s current-account deficit, which official data showed widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31.
The yield on the 7.16 percent government bonds due May 2023 fell six basis points, or 0.06 percentage point, to 8.14 percent, according to prices from the central bank’s trading system. It had earlier risen to 8.21 percent. The 10-year note’s 50-day historical volatility rose to 22.05 percent, the highest level since June 2009.
The RBI last month tightened cash supply to support the rupee. A weaker currency stokes inflation in a nation that imports about 80 percent of its oil.
“Markets are likely to give the RBI the benefit of the doubt and stabilize at current levels,” strategists at Barclays Plc, including Singapore-based Igor Arsenin, wrote in a research report today. “The jump in volatility following the tightening of liquidity by the RBI on July 15 makes it virtually impossible to trade, but we would look for an entry point as volatility drops.”
Three-month onshore rupee forwards rose 0.4 percent to 62.61 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts rose 0.5 percent to 62.75. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.